Private Business Counsel

Ernest Holtzheimer is co-author to this blog post. Holtzheimer is a 3L at Drexel University Thomas R. Kline School of Law, concentrating in business and entrepreneurial law.

Some of you may remember the 8-track players of the 1960s and ‘70s – or have heard the “back in the day” stories for those of us that are too young. Nevertheless, this post is referring to 8tracks, the music startup launched on August 8, 2008 that, according to its website, “has more than 2m playlists spanning every imaginable artist, genre, activity, mood and other theme — delivered in a thoughtfully-packaged, lean-back fashion.” Rather than going back to the venture capitalists who turned them down for a Series A round a few years ago, 8tracks is currently “testing the waters” to gauge market demand from potential investors for a securities offering under Tier 2 of Regulation A+. According to SeedInvest, the company’s funding portal, over $30.8 million has been “raised” by interested investors. (see 8tracks SeedInvest page).

8tracks can’t actually accept funds from non-accredited investors until May 16, 2016, when the final Regulation A+ rules become effective. After taking into account investor interests that might be less than firm, 8tracks reportedly hopes to raise about $10 million in its offering.  At least one source has reported that 8tracks plans to officially launch its campaign in June 2016, shortly after the final rules become effective.

The SEC has stated that issuers don’t have to elect a Tier under Regulation A+  until after “testing the waters,” in order to ascertain the amount of funds that can be raised. Under the Regulation A+ rules, issuers can choose to proceed under either Tier 1 or Tier 2 for offerings up to $20 million (although Tier 2 permits up to $50 million). Both tiers subject issuers to basic requirements, but companies conducting Tier 2 offerings are also subject to providing audited financial statements and annual, semiannual and current event reports.  For more information on Regulation A+, click here.

8track’s goal of $10 million and early election of a Tier 2 offering may seem counterintuitive. However, only Tier 2 offerings preempt state blue sky laws. This is much more attractive for companies looking to raise capital from investors located in more than one state, because it eliminates the time and expense it takes to register or find exemptions within each. Historically, most issuers have elected to use Rule 506 for their private offerings for the same reason.

It will be interesting to see if Tier 2 will become the Tier of choice for Regulation A+ offerings.  8tracks’ campaign should provide a good barometer.  We will be staying tuned.